FOREX-Euro rises on rate expectations, month-end demand

Thu Mar 31, 2011 6:30am EDT

Related Topics

* Euro zone flash inflation rises 2.6 percent year-on-year

* Euro firms broadly as interest rates expected to rise

* Month-end demand helps euro, Irish stress test results due

(Recasts, adds quote, detail)

By Neal Armstrong

LONDON, March 31 (Reuters) - The euro rose broadly on Thursday as above-forecast euro zone inflation cemented the case for gradual rate rises from the European Central Bank, though analysts cautioned against a rapid rise in the currency.

Traders said significant quarter-end and fiscal year-end flows were helping to boost the euro, at the particular expense of the greenback.

Eurostat estimated that consumer prices in the 17 countries using the euro jumped 2.6 percent year-on-year in March, up from 2.4 percent in February. Economists polled by Reuters had expected 2.3 percent.

European Central Bank Executive Board member Lorenzo Bini Smaghi on Wednesday implied that the central bank's policy is to gradually raise interest rates, with markets expecting the tightening cycle to begin in April. [ID:nLDE72T1ZS]

"The euro has priced in a lot of good news so it's hard to see it moving rapidly higher, but it can definitely continue on the upside," said Raghav Subbarao, currency analyst at Barclays Capital.

"The ECB wants to show they are concerned about inflation but there are clearly other risks and they have kept the full allotment of open market operations given concerns about financial stability."

Ireland later on Thursday announces the results of stress tests that are expected to signal the effective nationalisation of the entire financial system.

Tests are expected to reveal an additional 20-25 billion euro hole in Irish banks' capital and will be followed by a radical restructuring of the sector, the Irish Independent newspaper reported. [ID:nLDE72U0H9]

"Ireland is not a big risk to the euro as there is no systemic risk thanks to the euro zone rescue fund. Confidence is being driven by the larger euro zone countries," said Manuel Oliveri, currency analyst at UBS in Zurich.

The euro rose 0.6 percent against the dollar EUR= to $1.4220, coming within sight of its 2011 high of $1.4249. Traders said a break of option barriers at $1.4250 would be needed for further momentum on the upside.

The single currency hit a 10-month high versus the yen EURJPY=R around 117.85.

Anticipation that Japan would buck the global tightening cycle and leave interest rates low to support its quake-hit economy is encouraging players to sell the yen to fund higher-yielding investments, in a revival of the carry trade that flourished before the credit crisis began in 2007.

"Rate differentials are playing a big role, especially as there is no probability for the BOJ to become more hawkish, even in the medium- to long-term," said Oliveri.

"There is scope for rate expectations to stay supported in the euro zone. German demand and the service sector is strong so price rises are likely to become domestically driven, not just commodity driven."

The dollar rose to a three-week high of 83.21 yen JPY before running into selling by Japanese banks and foreign players along with some fiscal year-end yen demand from Japanese exporters. Strong offers were seen from 83.30 to 83.50, with more around 84.00.

The dollar was up around 9 percent from its record low of 76.25 yen set on March 17 before G7 central banks intervened in a rare coordinated move to stem the yen's rise. It was last at 82.85, unchanged on the day.

The Australian dollar hit a fresh 29-year high of $1.0348 AUD=D4 after favourable retail sales and credit growth data.

The dollar index fell around 0.5 percent to 75.747 .DXY, dented by month-end selling and the broad rise in the euro.

(Editing by Stephen Nisbet/Toby Chopra)

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